Munford v. Munford, Inc.

United States Court of Appeals,

Eleventh Circuit.

No. 94-9014.

Matter of MUNFORD, INC., d.b.a. Majik Market, Debtor.

Danné Brokaw MUNFORD, as Executrix of the Estate of Dillard
Munford; James M. Carroll; Russell Fellows; Joseph W. Hardin;
Jay Rubel; Winton M. Blount; Herbert J. Dickson; James L.
Ferguson; Robert M. Gardiner; Richard K. Leblond; Andrall E.
Pearson; S.B. Rymer, Jr.; DFA Investment Dimensions Group, Inc.;
PNC Bank, National Association; Boston Safe Deposit and Trust
Company; State Street Bank & Trust Company, Plaintiffs-Appellants,

Shearson Lehman Brothers, Inc., Plaintiff,

v.

MUNFORD, INC.; Valuation Research Corporation, Defendants-
Appellees.

Oct. 10, 1996.

Appeal from the United States District Court for the Northern
District of Georgia. (No. 1:94-00348-CV-GET), G. Ernest Tidwell,
Chief Judge.

Before HATCHETT, Chief Judge, CLARK, Senior Circuit Judge, and
MILLS*, District Judge.

HATCHETT, Chief Judge:

In this case arising in a bankruptcy context, the court

affirms the district court's ruling that 11 U.S.C. § 105(a) and

Federal Rules of Civil Procedure, Rule 16, authorize bankruptcy

courts to enter bar orders to facilitate settlements.

FACTS AND PROCEDURAL HISTORY

On June 17, 1991, Munford, Inc., acting as debtor in

possession under 11 U.S.C. §§ 544(b) and 1107(a), brought an

adversary proceeding in bankruptcy court in the Northern District

*
Honorable Richard H. Mills, U.S. District Judge for the
Central District of Illinois, sitting by designation.
of Georgia seeking to avoid transfers of property, disallow

contract claims, and recover monetary damages alleging that a

leverage buy out (LBO) that occurred in 1988 forced it into

bankruptcy. Munford, Inc. filed this action against Valuation

Research Corporation (VRC), Shearson Lehman Brothers (Shearson),

former officers and directors, and two of its largest groups of

shareholders seeking $68 million in damages. In its complaint,

Munford, Inc. alleged that VRC, a valuation and consulting firm,

failed to exercise reasonable care in issuing the solvency opinion

it rendered in connection with Munford, Inc.'s LBO. Munford, Inc.,

also alleged that its $75,000 payment to VRC for valuation services

rendered constituted a fraudulent conveyance under O.C.G.A. § 18-2-

22(3). In addition, Munford, Inc. asserted various claims of

breach of fiduciary duty, negligence, mismanagement, waste of

corporate assets, and fraudulent conveyance against the officers,

directors, shareholders and Shearson.

VRC denied liability arguing that it owed no duty of care to

Munford, Inc. because it only intended the LBO lender to rely on

its solvency opinion. Notwithstanding its denial of liability, it

offered to settle Munford, Inc.'s claims against it for $350,000 of

its $400,000 liability insurance policy, setting aside $50,000 of

its policy for attorney's fees. VRC, however, conditioned the

settlement offer upon the bankruptcy court's issuance of a

protective order permanently enjoining the officers, directors,

shareholders and Shearson (hereinafter the nonsettling defendants)

from pursuing contribution or indemnification claims against it.

On May 31, 1993, Munford, Inc. agreed to VRC's settlement
terms and submitted the proposed settlement agreement to the

bankruptcy court for approval as required under Rules of Bankruptcy

Procedure 9019(a).1 The bankruptcy court held a fairness hearing

on Munford, Inc.'s motion and found that the insurance policy

represented VRC's only substantial asset. On December 21, 1993,

the bankruptcy court approved the settlement agreement and issued

an order permanently enjoining the nonsettling defendants from

asserting contribution and indemnification claims against VRC

pursuant to 11 U.S.C. § 105(a) and Federal Rules of Civil Procedure

16. In that order, the bankruptcy court also held that the

nonsettling defendants would receive a dollar-for-dollar reduction

of the settlement amount for any judgment subsequently awarded

against them in the LBO litigation. On August 8, 1994, the

district court affirmed the bankruptcy court's order. The

nonsettling defendants filed this appeal.

CONTENTIONS

The nonsettling defendants contend that the bankruptcy court

erred in entering an order barring them from asserting state law

contribution and indemnity claims against VRC, a nondebtor, when it

approved Munford, Inc. and VRC's settlement agreement asserting

that: (1) the bankruptcy court lacks subject matter jurisdiction

over its unasserted state law contribution and indemnity claims

against VRC; and (2) that the bankruptcy court lacks legal

authority to enter such bar orders. Assuming the bankruptcy court

properly entered the bar order, the nonsettling defendants contend

1
Rules of Bankruptcy Procedure 9019(a) requires the trustee
of the estate to submit proposed settlement agreements for
approval.
that the bankruptcy court erred in ruling that a dollar-for-dollar

credit based on VRC's settlement amount rather than a relative

fault offset applies to any judgment rendered against the

nonsettling defendants. Specifically, they assert that such a

credit deprives them of their substantive rights of contribution

and indemnity because VRC's settlement amount represents only

one-half of a percent of the damages Munford, Inc. seeks.

VRC and Munford, Inc. contend that the bankruptcy court had

subject matter jurisdiction and legal authority to enter the bar

order because: (1) the bar order arose in and related to Munford,

Inc.'s motion to approve the settlement agreement with VRC; and

(2) the bar order facilitated its settlement. VRC and Munford,

Inc. also contend that the bankruptcy court's dollar-for-dollar

credit against any subsequent judgment entered against nonsettling

defendants constitutes a fair and equitable judgment offset

asserting that it does not have assets sufficient to satisfy a

larger judgment against it.

ISSUES

We address the following issues in this appeal: (1) whether

the bankruptcy court has subject matter jurisdiction over the

nonsettling defendants' unasserted state law contribution and

indemnity claims; (2) whether 11 U.S.C. § 105(a) and Federal Rules

of Civil Procedure 16 authorize bankruptcy courts to enter bar

orders to facilitate settlement; and (3) whether a

dollar-for-dollar credit against any subsequent judgment entered

against nonsettling defendants constitutes a fair and equitable

judgment offset.
 DISCUSSION

A. Subject Matter Jurisdiction

We first address whether the bankruptcy court has subject

matter jurisdiction over the nonsettling defendants' unasserted

state law contribution and indemnity claims. This court reviews

questions of law de novo applying the same legal standards that

bound the district court. Infant Formula Antitrust Litigation v.

Abbott Laboratories, 72 F.3d 842, 843 (11th Cir.1995).

In this case, the nonsettling defendants contend that the

bankruptcy court lacks jurisdiction to enter an order barring their

state law claims of contribution and indemnity against VRC because

these claims were unasserted, against nondebtors, and not ripe.

The nonsettling defendants also contend that the bankruptcy court

lacks jurisdiction over their contribution and indemnity claims

because they could not have asserted these claims as cross-claims

in the adversary proceeding of the bankruptcy court's limited

jurisdiction under 28 U.S.C. §§ 157 and 1334. In response, VRC and

Munford, Inc. argue that the bankruptcy court has subject matter

jurisdiction to enter a bar order over these claims because the bar

order affecting these claims arose in and related to Munford,

Inc.'s motion to approve the settlement agreement with VRC under

the Rules of Bankruptcy Procedure 9019(a). For purposes of this

discussion, we address the nonsettling defendants' contentions in

reverse order.

Although bankruptcy courts have limited jurisdiction, each

district court may provide the bankruptcy court in that district

with subject matter jurisdiction on "any or all cases under title
11 and any or all civil proceedings arising under title 11 or

arising in or related to a case under title 11." 28 U.S.C. §

157(a) (1994). In order for the bankruptcy court to exercise

subject matter jurisdiction over a dispute, however, some nexus

between the civil proceeding and the title 11 case must exist.

Lemco Gypsum, Inc. v. Miller, 910 F.2d 784, 787 (11th Cir.1990).

" "[T]he test for determining whether a civil proceeding is related

to bankruptcy is whether the outcome of the proceeding could

conceivably have an effect on the estate being administered in

bankruptcy.' " Lemco Gypsum, Inc., 910 F.2d at 788 (quoting Pacor,

Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984)). In other words,

" "[a]n action is [sufficiently] related to bankruptcy if the

outcome could alter the debtor's rights, liabilities, options, or

freedom of action (either positively or negatively) and which in

any way impacts upon the handling and administration of the

bankrupt estate.' " Lemco Gypsum, Inc., 910 F.2d at 788 (quoting

Pacor, Inc., 743 F.2d at 994).

In order to apply the "nexus" test to the facts of this case,

we must treat the nonsettling defendants' contribution and

indemnity claims as though they had been in state court at the time

the bankruptcy court approved Munford, Inc. and VRC's settlement

agreement. Next, we must determine whether at the time Munford,

Inc. filed its motion to approve the settlement agreement in

bankruptcy court a state civil action based on claims of

contribution and indemnity from nonsettling defendants against VRC

could have conceivably altered Munford, Inc.'s rights, liability,

options, freedom of action and thereby impact upon the handling and
administration of the bankruptcy estate. This inquiry is not

difficult. As previously noted, VRC conditioned its settlement

offer on the bankruptcy court entering an order barring the

nonsettling defendants from asserting contribution and indemnity

claims against it. The parties do not dispute that without the

district court entering the bar order in this case Munford, Inc.

would have lost its "option" to settle its claims against VRC and

the right to receive $350,000 for the estate. Because the

nonsettling defendants' assertion of their contribution and

indemnity claims would have an effect on Munford, Inc.'s estate

being administered in bankruptcy, we hold that a sufficient nexus

exists between this title 11 adversary proceeding and the

nonsettling defendants' contribution and indemnity claims. In so

holding, we do not dispute the nonsettling defendants contention

that non-debtors in an adversary proceeding cannot assert state

cross-claims of contribution and indemnity because such claims

standing alone fail the nexus test—i.e., "could not conceivably"

have an effect on the debtor's estate in an ordinary bankruptcy

case. In this case, however, the nonsettling defendants'

contribution and indemnity claims affect the debtor's estate

because VRC would not settle Munford, Inc.'s claims against it

without the bankruptcy court entering a bar order. The nonsettling

defendants respond arguing that the "bar order" condition is in

effect "subject matter jurisdiction by consent." We disagree with

the nonsettling defendants' characterization noting that "[s]ubject

matter jurisdiction can never be waived or conferred by the consent

of the parties." Latin American Property & Casualty Ins. Co. v.
Hi-Lift Marina, Inc., 887 F.2d 1477 (11th Cir.1988). It is not the

language of the settlement agreement that confers subject matter

jurisdiction in this case. Rather, it is the "nexus" of those

claims to the settlement agreement—an agreement, we emphasize, that

the bankruptcy court must approve pursuant to Rules of Bankruptcy

Procedure 9019(a).

In addition, we reject the nonsettling defendants'

contentions that the bankruptcy court lacks subject matter

jurisdiction to enter the bar order because these claims were

unripe and between nondebtors. First, a claim is ripe for

adjudication, regardless of whether it is asserted, when "the claim

is sufficiently mature, and the issues sufficiently defined and

concrete, to permit effective decisionmaking by the court."

Restigouche, Inc. v. Town of Jupiter, 59 F.3d 1208, 1212 (11th

Cir.1995). Second, for purposes of subject matter jurisdiction the

civil proceedings related to bankruptcy " "need not ... be against

the debtor or against debtor's property.' " Lemco Gypsum, Inc.,

910 F.2d at 788 (quoting Pacor, Inc., 743 F.2d at 994). We

therefore hold that the bankruptcy court has jurisdiction over the

nonsettling defendants' claims to enter a settlement bar order.

B. Settlement Bar Orders

Next, we address whether the bankruptcy court has legal

authority to enter the order barring the nonsettling defendants

from asserting claims of contribution and indemnity against VRC.

In entering the bar order, the bankruptcy court concluded that 11

U.S.C. § 105(a) along with Federal Rules of Civil Procedure 16

granted it authority to enter the bar order in aid of settlement.
The nonsettling defendants contend that the bankruptcy court

misapplied rule 16 arguing that rule 16 does not grant courts the

right to enter bar orders.2

Section 105(a) of the Bankruptcy Code provides that "[t]he

court may issue any order, process, or judgment that is necessary

or appropriate to carry out the provisions of this title." 11

U.S.C. §§ 105(a) (1994) (emphasis added). Rule 16 which is

incorporated in adversary proceedings under Rules of Bankruptcy

7016, states in pertinent part:

At any [settlement] conference under this rule consideration
may be given, and the court may take appropriate action, with
respect to

....

(9) settlement and the use of special procedures to assist in
resolving the dispute when authorized by statute or local
rule.

Fed.R.Civ.P. 16(c)(9). We conclude that section 105(a) and rule 16

taken together provide ample authority for the bankruptcy's court

action. Section 105(a) clearly provides that the bankruptcy court

can enter "any order" necessary or appropriate to carry out the

provisions of the Bankruptcy Code, while rule 16 authorizes the use

of special procedures to assist the parties in reaching a

settlement. Several justifications for entering bar orders in

bankruptcy cases exist. First, public policy strongly favors

pretrial settlement in all types of litigation because such cases,

depending on their complexity, "can occupy a court's docket for

2
The nonsettling defendants also contend that O.C.G.A. § 51-
12-32 which provides that a settling tortfeasor retains its right
to contribution against a nonsettling tortfeasor prohibits the
bankruptcy court from entering its bar order. This argument
lacks merit and does not warrant further discussion.
years on end, depleting the resources of parties and the taxpayers

while rendering meaningful relief increasingly elusive." U.S. Oil

& Gas v. Wolfson, 967 F.2d 489, 493 (11th Cir.1992). Second,

litigation costs are particularly burdensome on a bankrupt estate

given the financial instability of the estate. Third, "bar orders

play an integral role in facilitating settlement." U.S. Oil & Gas,

967 F.2d at 494. This is because "[d]efendants buy little peace

through settlement unless they are assured that they will be

protected against codefendants' efforts to shift their losses

through cross-claims for indemnity, contribution, and other causes

related to the underlying litigation." U.S. Oil & Gas Litigation,

967 F.2d at 494. But for the bankruptcy court's bar order in this

case, for example, VRC would not have entered into the settlement

agreement with Munford, Inc. For these reasons, we hold that

section 105(a) and rule 16 authorize bankruptcy courts to enter bar

orders where such orders are integral to settlement in an adversary

proceeding.

C. The Dollar-for-Dollar Offset

Finally, the nonsettling defendants argue on appeal that the

dollar-for-dollar reduction based on VRC's settlement amount

against any judgment rendered jointly against nonsettling

defendants does not sufficiently protect their interest.

When determining whether to enter a bar order against

nonsettling defendants, the court must make a reasoned

determination that the bar order is fair and equitable. U.S. Oil

& Gas Litigation, 967 F.2d at 496. In making such a determination,

courts consider the interrelatedness of the claims that the bar
order precludes, the likelihood of nonsettling defendants to

prevail on the barred claim, the complexity of the litigation, and

the likelihood of depletion of the resources of the settling

defendants. U.S. Oil & Gas Litigation, 967 F.2d at 493-96.

The nonsettling defendants contend that VRC's solvency opinion

gave them an assurance that Munford, Inc. would survive the LBO

transaction and that they reasonably relied on the opinion in

approving the LBO transaction. They therefore assert that VRC's

$350,000 settlement amount constitutes an inequitable settlement

because it represents only one-half of a percent of the $68,000,000

Munford, Inc. seeks to recover from the nonsettling defendants.

Instead, the nonsettling defendants argue, the court should have

reserved its approval of the settlement agreement to include a

credit based on the relative fault of VRC and not the

dollar-for-dollar settlement credit. The nonsettling defendants

also argue that the dollar-for-dollar settlement credit deprives

them of their substantive rights of contribution and

indemnification, noting that but for the settlement agreement they

would receive a dollar-for-dollar credit and retain the right to

pursue actions for contribution and indemnity against VRC under

state law. See O.C.G.A. § 51-12-32. The nonsettling defendants

therefore assert that the reasonable price for taking away their

rights to contribution and indemnification is to allow a credit

against any subsequent judgment based on the proportionate fault of

VRC.

In response, VRC and Munford, Inc. contend that the district

court's application of a dollar-for-dollar credit against any
subsequent judgment entered against nonsettling defendants

constitutes a fair and equitable judgment offset. They assert that

the record demonstrates that the settlement affords nonsettling

defendants a far greater benefit than they would receive from their

prospective contribution and indemnity claims. VRC and Munford,

Inc. base this assertion on several facts. First, VRC asserts that

its greatest asset is a $400,000 insurance policy, and without the

settlement it will exhaust this policy in litigation costs in

defending itself in this action. Second, it asserts that it is

unlikely that the nonsettling defendants would prevail against VRC

in a contribution or indemnity action based on an allegation that

the nonsettling defendants relied on VRC's solvency opinion

because: (1) the solvency opinion included disclaimers which

stated the solvency opinion was limited in scope and only intended

to be relied upon by Citibank, the LBO lender; and (2) "none of

the [nonsettling] defendants saw or reviewed the opinion prior to

consummation of the LBO." In re Munford, Inc., 172 B.R. 404, 413

(N.D.Ga.1993). Finally, VRC and Munford, Inc. assert that the

offset as provided in the bankruptcy court's order ensures that

Munford does not enjoy a double recovery against nonsettling

defendants in any subsequent litigation. We agree.

In this case, VRC's settlement offer constitutes $350,000 of

its $400,000 insurance liability coverage. The remaining $50,000

is reserved for attorney's fees and other litigation cost related

to this action. On appeal, the nonsettling defendants do not argue

that VRC has the ability to pay more than the $350,000 it offered

in settlement. Rather, they argue that VRC may obtain assets in
the future increasing its net worth. It is more likely, however,

that the LBO litigation will deplete the assets VRC presently owns

and any future assets they obtain. This viewed together with the

fact that VRC included disclaimers in its solvency opinion supports

the finding that the bankruptcy court's dollar-for-dollar credit

constitutes a fair and equitable offset. We therefore conclude

that the bankruptcy court did not abuse its discretion in ruling

that a dollar-for-dollar credit will be applied against judgment

subsequently rendered against the nonsettling defendants.

Accordingly, we affirm the bankruptcy court's grant of a

dollar-for-dollar reduction against any judgment ultimately

rendered against the nonsettling defendants. In reaching this

holding today, we decline to adopt a per se method for offsetting

settlement amounts.

CONCLUSION

For the above stated reasons, we affirm the district court.

AFFIRMED.